Canada's inflation rate lower in July at 2.1 per cent, down from June

Statistics Canada said the rise in the cost of living was tempered in July, with the annual inflation rate coming in at 2.1 per cent.

That was down from June when the consumer price index rose by 2.4 per cent over 12 months, a two-year high.

But in a separate report, retail sales showed strong growth, jumping by 1.1 per cent in June to $42.6 billion â€” a third consecutive month of increases that added up to a nearly five per cent rise in sales during the first half of 2014.

The conflicting readings send two different messages to the Bank of Canada about its trend-setting policy rate, said Doug Porter, chief economist at BMO Capital Markets.

Still, the tone set by the numbers is that economic growth is taking a foot-hold, said Porter.

"The (central) bank tends to take CPI a bit more seriously, and inflationâ€™s calmer tone after the first-half run-up will come as a significant relief for policy-makers," he said in a note to clients.

"On the flip side, the underlying strength in consumer spending is impressive, and adds to the view that growth made a nice recovery in the spring and early summer after the sluggish start to the year.

The Bank of Canada keeps a close eye on inflation as it calculates whether to move interest rates higher or lower.

Its key rate has held at one per cent for nearly four years and the consensus among economists is that it's not expected to edge upward until closer to mid-2015.

Statistics Canada said prices were higher in July in all eight components it looks at, with shelter costs leading the way, up 3.0 per cent in July, higher than the 2.9 per cent increase seen in June.

Food prices also rose by 2.9 per cent, matching the previous month's up tick. Fresh vegetables made up a big chunk of the increase in food prices, rising 7.5 per cent on a year-over-year basis.

In the volatile energy category, natural gas prices skyrocketed in July, up 20.4 per cent from the same month a year earlier.

However, gasoline costs were up by just 2.1 per cent in July, backing off from the 5.4 per cent increase recorded in June.

And while energy prices will determine which direction the headline inflation rate will take in the coming months, core inflation will likely hover at just under the Bank of Canada's target rate of two per cent over the next few months, predicted RBC assistant chief economist Dawn Desjardin.

"Gyrations in the headline rate will be driven by energy prices that will likely result in a move lower in mid-2015," said Desjardin.

"That said, the underlying trend in inflation will be sufficiently high to convince the Bank to lessen the amount of policy accommodation with the first rate hike most likely to be announced in the second quarter of 2015."

Removing energy and food prices from the mix, Canada's core inflation rate â€” the number the central bank looks at most closely â€” was up by 1.7 per cent in July, down from 1.8 per cent the previous month.

Ontario, Saskatchewan and Alberta saw the biggest jump in prices in a provincial breakdown. Ontario's inflation rate reached 2.5 per cent in July, although that was down from a 3.0 per cent spike in June.

In Saskatchewan, prices were also up by 2.5 per cent for July, an increase from the previous month's 2.2 per cent mark. British Columbia recorded the smallest increase on a provincial basis, at 1.4 per cent, down from 1.9 per cent in June.

On the retail front, figures released by Statistics Canada for June marked a sixth consecutive monthly increase in sales.

But Scotiabank Economics vice president Derek Holt anticipated retail sales growth â€” up by a seasonally-adjusted seven per cent in the second quarter â€” will be short-lived.

"It's a temporary unleashing of pent-up demand from a more miserable than usual winter and will not last into Q3," Holt said.

Retail sales were up in eight of 11 subsectors, and higher by 4.7 per cent overall in the first half of the year compared with the same period in 2013.

By province, sales were higher everywhere except Saskatchewan.

General merchandise stores saw sales rise the most in June, up 3.9 per cent.

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